The great clampdown

With the economy still gloomy and banks unwilling to finance investments that are deemed to have any kind of risk, property financing is in a dire way.

While this continues to bring misery to the industry, the illiquid finance market is now beginning to show up the potential illegal activity in past property financing and contract deals. Now the authorities are examining these allegations of fraudulent activity within the market with increased vigour.

The Serious Fraud Office (SFO) and the Financial Services Authority (FSA) now appear to be working overtime to come down hard on anyone whose illegal activities during the boom times may have resulted in the financial turmoil that now engulfs the country, ranging from insider trading to property-related fraud.

In a previous issue, we outlined the type of activity that has occurred in the market. In that case, The Investment Building Bank of London (IBBL) was uncovered as a rogue property investment firm who defrauded investors with offers of cheap property and high returns for investment in the company. Only when IBBL had gone into administration was the reality observed that the business could offer neither. It had defrauded investors and potential buyers of their money, and the owners then absconding when the business collapsed. Interest has been taken in this and a case may well follow in due course.

Further cases of alleged property finance fraud are now in front of the courts, one of which involves one of the UK’s leading socialite entrepreneurs.

In early December, around a hundred police officers from the SFO swooped on 10 locations in London, Surrey, Cheshire and Derby. The officers seized information relating to companies Gresham Ltd and Gresham Finance (London) Ltd. It is worth noting that these companies are both completely unrelated to Gresham Finance Ltd, which is not under any investigation by the SFO – though it is thought that the similarity in names may have been used to help give a good name to the accused.

On 3 December 2009, entrepreneur Lord Edward Davenport, Martin Peter Riley, and David Martin Layard Horsfall, a partner in a Surrey law firm, appeared in front of the City of London Magistrates charged with conspiracy to defraud, deception and money laundering.

The allegations against the three focus around loans offered to property development companies. Through the Gresham Ltd company name, offers of loans ranging up to £250m were publicised in newspapers and across the internet. This attracted a variety of international property investors, mostly from Europe, interested in loans for development. According to the SFO, interested parties were then charged a due diligence charge of between £5,000 and £50,000, followed by a security deposit. Once this had been paid however, investors did not receive their promised loans and did not see their money again. It suggested that the money was then moved through a web of company to escape the notice of authorities, before ending up in tax havens such as St Kitts. It’s estimated that around £12m was taken from investors with no returns given.

The case has garnered more attention as Davenport, who is accused of acting as shadow director for Gresham Ltd’s actions, is one of London’s top socialites. He is the owner of 33 Portland Place, a leading venue for socialite events such as the Gatecrasher Ball popular among the capital’s celebrities. Davenport’s website boasts an impressive gallery of photographs taken with him alongside leading figures such as Simon Cowell, members of The Rolling Stones, as well as political figures such as Ken Clarke and Alastair Campbell.

Yet now even this situation has turned sour for Davenport, after a judge granted an interim injunction from 33 Portland Place being used for commercial purposes. The judge believed Davenport to be exploiting the building’s status as a registered residential property. Davenport’s lawyers protested he was simply “down on his luck”.

Davenport’s and his co-defendants’ case is ongoing. Yet while it is, the SFO have been keen to prove they are not holding back on investigations into alleged property finance-related crime.

At the same time, another unconnected property finance case was launched. In this case Ian McGarry, the former city head of valuations at Dunlop Hayward property, was charged in December on felonies relating to mortgage fraud, as part of a series of arrests following a prolonged investigation by the SFO.

The charges relate to McGarry’s alleged involvement in the fraudulent obtaining of up to £50m from various financial institutions including the Cheshire Building Society, through the artificial and deceitful inflation of property values.

This is understood to have occurred through methods such as the creation of false leases that distorted the appearance of potential earnings from a property, artificially raising the valuation which the lender then acted upon.

Such leases were then understood to have been backed up by falsified evidence from local solicitors and property experts. As such a further five people, including solicitors and a company director, were charged at the time of McGarry’s arrest in December. Since then, a further two solicitors from the West Midlands and Cheshire areas have been charged in relation to the case.

The case has been a long time coming. Financial anomalies related to Dunlop Hayward transactions were first identified around 2006. West Midlands police investigated the allegations at the time, before referring the case to the SFO in late 2006. The fact that the SFO waited until December 2009 to make arrests suggests they have spent their time gathering information on this case. For whatever reason, the case will send a very strong message to the  property industry.  

At time of writing both cases are still active. Regardless of their outcome, it’s clear that the UK authorities are keen to investigate any allegations of fraud or corruption within the industry. Significantly though, the authorities are offering companies that find themselves in such situation an easier way forward.

Legislation has been put in place for companies to effectively ‘turn themselves in’ to the SFO if they find some element of wrongdoing in their actions. This has been particularly useful for companies who have performed takeovers only to find themselves later embroiled in legal issues as a result of the previous action of companies they’ve taken over – or simply allows companies to come clean.

A recent example involves MW Kellogg, who are understood to have secured around $5bn of construction contracts in Nigeria through the bribing of officials. Upon discovery, investigations were launched both in the US and the UK into the company’s action. Last year, co-owners of MW Kellogg, Halliburton and KBR, were fined £378m by the US Government. As such they have agreed to cooperate with the SFO in the UK, providing requested information in return for a more lenient sentence.

Though ongoing, yet it is likely there will still be a substantial amount to pay. In July 2009, bridge-building firm Mabey & Johnson gave details to the SFO of similar actions in Jamaica and Ghana. They were fined £6.6m. This was more than 10 percent of the company’s yearly turnover. As the sums involved in the MW Kellogg case are far more substantial, it can be expected that their fines UK fines will be too.  

Clearly time has thus run out for those involved in bribery and fraud within the property industry. With the new vigour displayed by both the SFO and FSA, its only a matter of time until such actions come back to haunt those found guilty. And the time is likely to come sooner rather than later.